National CBA Guidance Framework Bucharest 9 th October

National CBA Guidance Framework Bucharest, 9 th October 2008 Massimo Marra JASPERS Regional Office for Romania and Bulgaria

What is JASPERS § ‘Joint Assistance to Support Projects in European Regions’ § Objective: increasing the capacity of the beneficiary countries to make the best use of EU Structural Grant funding § A technical assistance partnership to prepare major projects between DG REGIO-funded (32 professionals + 10 support staff), EIB (16 professionals), EBRD (5 -8 professionals) and now KFW. § Value added: draws on past experience and expertise of the EIB and the other banks involved § JASPERS is managed within the EIB but separated from its lending activities 2

JASPERS Structure 32 experts + 10 support 16 experts 5 -8 experts JASPERS 60 professional STAFF + support STAFF LUXEMBOURG 3 regional offices WARSAW since November 2006 VIENNA since March 2007 BUCHAREST since April 2007 3

JASPERS activities F Focus on 12 ‘new’ Member States F Objectives: - Increase the capacity of beneficiary countries, make best use of EU funding - Improve absorption of funds - Improve projects quality § JASPERS concentrates on Major Projects : - Transport and other sectors € 50 M > capital cost Environment € 25 M > capital cost § JASPERS priorities are : large projects supported by Cohesion Fund and ERDF other Cohesion Fund projects other ERDF projects § Horizontal Issues covering more than one country/sector (as CBA) 4

What does JASPERS offer? § Assistance from early stages of project through to the decision to grant assistance § Preparatory work required to deliver a mature project e. g. ü ü Advice on conceptual development and project structuring Advice on project preparation e. g. cost-benefit analysis, financial analysis, environmental issues, procurement planning. Review of documentation: feasibility studies, technical design, tender documents. Advice on compliance with EU law (environmental, competition and others) and conformity with EU policies 5

Rationale for CBA Guidelines q Council Regulation 1083/2006 - Art. 40 - Major Projects: MS to provide the Commission with (…) a cost-benefit analysis, including a risk assessment and the foreseeable impact on the sector concerned and on the socio-economic situation of the MS - European Commission to provide guidance on CBA q EC Guidance - Working Document 4: clarifications for period 2007 -2013 - MS encouraged to develop own CBA framework - EC CBA GUIDE– revised version published in June 2008 q Ultimate Goals for CBA Guidelines and JASPERS support F Ensure soundness and consistency across project (quality of projects) F Facilitate and speed up approval process (absorption of funds) F Minimise risks of future refunding to EU (due to Funding Gap miscalculations) 6

Objectives of the National CBA Framework (i) strengthening the capacity of Romanian authorities to assess the quality of Major Project Applications for projects to be financed by the Cohesion and ERDF Funds, as lied down in the relevant Operational Programmes. ii) to develop a suitable methodological framework to carry out the CBA of EU funded project in accordance to applicable regulations and requirements from the European Commission; iii) to support the implementation of this framework through institutional strengthening and training of the relevant Romanian authorities (ACIS, MAs, IBs) to provide guidance (to beneficiaries and consultants) and supervise the CBA of the different EU funded projects. 7

Initial CBA needs assessment General topics ü ü Previous experience with CBA analysis and critical issues identified Available manuals and documentation produced under previous projects and/or used currently in project assessment National procedures currently enforced for project preparation, assessment and selection (and relevant legislative references) Planned projects for 2007 -2013 and needed CBA input Specific data requirements ü ü ü Macroeconomic data and general assumptions (inflation, GDP growth national/local, unemployment at local level, etc. ) Info on affordability issues (households’ disposable income at local level, statistics on expenditures) and policy Info on tariff systems at sectoral level (road tolling/vignettes, water fees, landfill taxes and tipping fees) Specific sectoral forecasts (e. g. energy intensity trend forecast) Data for economic benefits (value of life/time, WTP for municipal services, etc. ) if already available 8

MEF- ACIS Experts Working Group a) b) c) d) e) f) g) h) i) j) k) l) Main counterpart to the Jaspers team and overall management of the process Help with access to relevant stakeholders Provision of background information, available studies and data Access to relevant legislation and advice on its applicability Access to relevant statistics (aggregated/disaggregated data) both at national and local level, including macroeconomic forecasts Access to sectoral data and other info – desktop analysis if needed Translations If need arises, implementing surveys and direct data collection After finalisation, performing maintenance and updates of the Guidelines (Jaspers could provide specific technical support) If envisaged, logistics and workshops/conference organisation (including its financing) Dissemination and support to Final Beneficiaries Provision of training to final beneficiaries 9

National CBA Guidelines F Developed jointly by Romanian Authorities and JASPERS - based on experience first approved projects and dialogue with EC F F National CBA Guidelines to be consistent with EC and Romanian requirements (HG 28/2008) Valid for ALL projects co-financed by Structural Funds & General CBA Guidance document § § § & Rationale and objectives What is a CBA and why/when perform it (small projects) General methodological Approach (discount rates, reference period, etc. ) Macroeconomic assumptions and data to be used Valid for all sectors To be formally embedded in national approval process Sectoral CBA Guidelines for Water, Transport, SW, DHs & Energy § § § § Strategic approach and definition of objectives Project identification and demand assessment Feasibility and Option Analysis Financial Projections Economic Analysis Risk and Sensitivity analysis Conclusions and presentation of results 10

Sectoral guidelines § To provide operational guidance for CBA application in specific sectors § Expert audience (consultants, MAs and IBs, Beneficiaries) § First round of guidelines on sectors where JASPERS can provide direct support: ü Integrated water projects: water treatment, network rehab+ extension, wastewater collection and treatment, storm water and drainage. ü Waste management: waste collection, transport, treatment and disposal ü Energy: energy efficiency, RES, transport networks, environmental standards, district heating. ü Transport: roads, railways, ports and airports, urban transport 11

CBA Structure as required by EC STRUCTURE OF CBA 1. Option and Feasibility Analysis How can an objective be achieved? Are the selected options feasible? CBA main elements 2. Financial Analysis Does the project need cofinancing? How much money is necessary to implement the option selected? 3. Economic Analysis Is the project worth cofinancing? What is the impact on the area where the project is going to be implemented? 4. Risk Analysis Which are the most likely financial and economic results? 12

Sequence of CBA for National Guidelines ð Investment identification and definition of objectives ð Option Analysis and Selection ð Financial Analysis ð Economic Analysis ð Risk and Sensitivity analysis ð Conclusions and presentation of results 13

Definition of Project Objectives SOP Objectives – Priority Axis 1 Objective 1 Provide adequate water and sewerage services, at accessible tariffs Objective 2 Provide adequate drinking water quality in all urban agglomerations Objective 3 Improve the purity of watercourses Objective 4 Improve of the level of WWTP sludge management Objective 5 Create innovative and efficient water management structures Example Project Objectives Specific Objective Values without project Expected value after completion 1. Increase in coverage of water and sewerage services % of population connected to water supply and sewerage systems 2. Improvement of quality of drinking water to meet EU standards (98/83/EC) % of population with drinking water meeting EU standards 3. Increase of coverage of wastewater treatment to meet Urban WWT Directive Number of agglomerations with adequate wastewater treatment 4. Establish efficient operators and associated structures (ROCs, IDAs) Number of ROC/IDA with adequate set up and capacity to manage water/ww systems 14

Option Analysis and Selection Assessment of existing infrastructures Identification of problems (How/Why objectives are not met) Project Objectives Identification of options (What can we do to meet objectives) First screening and shortlist Multicriteria analysis National policy and SOP Objectives Comparison of retained options (technical and economic) Selection of preferred option 15

Financial Analysis To establish: F Level of financial self-sufficiency and performance indicators F Funding Gap and project financing structure F Financial sustainability of the project (cumulative cash flows) Ø Projections of financial flows of the project for without (baseline) and with project scenarios: ü ü ü Revenues (demand evolution and tariff increases) Operating and maintenance costs (also estimate cost savings) Total planned investment (including residual value) Ø Reference period depends on economic life of the project Ø Financial discount rate set at 5% in real terms Ø Project impact = Difference between with and without scenario (incremental approach) 16

Project profitability indicators Ø Incremental cash flows used to determine financial performance indicators before and after EU grant ü ü Ø Project assessment with requested EU grant: ü ü Ø If not state aid, FNPV/C needs to be <0 (or FRR/C< 5%) If revenue generating: Funding Gap calculation financial package completed with cofinancing & loans ensure FRR/K (return on “national” capital) not excessive Financial sustainability ü ü requires cumulative cash flow positive for all years ideally at project level, surely needed at operator level 17

Funding Gap (1) § For revenue generating projects (as per Art. 55 of Regulation 1083/2006) is the way to determine EU Grant cofinancing § If project revenues do not cover O&M costs, then the project is not revenue-generating § Calculation based on incremental cash flows, and normally using constant euros § Non cash items (depreciation) and contingencies not to be included § See details in Working Document 4: Guidance on the Methodology for Carrying Out Cost-Benefit Analysis, prepared by the Commission in August 2006 18

Funding Gap (2) DIC: Discounted Investment cost Funding gap R% Gross self-financing margin (100 -R)% DNR: Discounted Net Revenue* The “funding gap” is the part of the investment cost which is not going to be paid back by the project net revenues. The funding-gap rate is the complementary to 100% of the gross self-financing margin. Funding gap rate: * Discounted net revenue = + discounted revenue – discounted operating costs (including replacement of E&M equipm. ) + discounted residual value 19

Factors to consider in establishing FG Article 55(2): “Eligible expenditure on revenue-generating projects shall not exceed the current value of the investment cost less the current value of the net revenue from the investment over a specific reference period (…) In the calculation, the managing authority shall take account of the reference period appropriate to the category of investment concerned, the category of project, the profitability normally expected of the category of investment concerned, the application of the polluter-pays principle, and, if appropriate, considerations of equity linked to the relative prosperity of the Member State concerned. ” ü Polluter pays principle: Relevant for setting infrastructure user charges that should reflect the correct application of the Polluter Pays Principle. ü Affordability (equity): Practically, total charges paid by the users of the infrastructure/project services should not exceed certain commonly accepted thresholds. 20

Economic Analysis F To establish if the project has a positive net contribution to society (ENPV>0, ERR> social discount, B/C ratio positive) Ø Similarly to financial analysis comparisons between benefits and costs, but: ü Costs measured in term of “opportunity” foregone ü Benefits reflects both saving in costs and external benefits not valued by financial prices Ø Social discount rate set at 5, 5% Ø Incremental impact on society = Difference between with and without ‘economic’ scenario 21

Sensitivity and Risk Analysis § Purpose is to assess the robustness of the project financial and economic profitability indicators (FRR/C, FNPV/C, ERR, ENPV) § First, identification of key variables and their impact in terms of changes in the profitability indicators § Second, calculate “switching values” for those variables for which a variation of 1% results in a variation of more than 5% in the profitability indicators § Finally, estimate probability distributions for the profitability indicators based on the probability distribution of all the key variables/ 22

CBA Conclusions ü Standard format for presenting CBA results (Application Form info requirements) ü Does the project needs co-financing? ? F F F ü Financial analysis FNPV/C <0; Revenue Generating Funding Gap Financial sustainability ensured Is the project worth co-financing? ? F F F Economic analysis results ENPV, ERR and B/C ratio Other benefits/costs not monetised needs to be listed 23

THANK YOU! marra@eib. org 24